By A Special Correspondent Courtesy The Island

July 26, 2016, 7:53 pm

On May 11, 2011, following a seven-week trial and twelve days of deliberations, the jury returned a verdict finding Mr. Rajaratnam guilty of the fourteen counts charged. The District Court of the Southern District of New York observed that ‘ government and media unfairly and inaccurately portray Mr. Rajaratnam as the poster child for every wrongful act that has ever been associated with Wall Street. But the Raj Rajaratnam who emerges from the evidence before the Court bears scant resemblance to the greedy criminal kingpin the government attempts to portray. The record before the Court is also replete with evidence of Mr. Rajaratnam’s keen intellect and dogged work ethic, on the basis of which he built one of the largest and most successful investment funds in the world.

With the sole, and significant, exception of his criminal conviction in this case, the evidence shows that Mr. Rajaratnam lived a life that was not just blameless, but exemplary. He has been not only a law-abiding, tax-paying, productive member of society, but an extraordinary force for good, donating over $45 million of his personal wealth to charitable causes here and abroad. Whereas the crimes of his conviction had not a single identifiable victim, his charitable acts enriched countless lives – and surely saved more than a few.

Mr. Rajaratnam’s first priority after he was charged was not himself, but the return of his investors’ capital. Virtually all of their liquid investments were promptly returned within a matter of weeks in the most efficient manner permissible. Indeed, Mr. Rajaratnam and Galleon’s other officers waived contractual notification periods for investor redemptions and certain fees that Galleon could have charged, so as to return investor money as quickly and completely as possible. These facts alone stand this case in stark contrast to recent notorious Wall Street frauds involving executives who fleeced investors, lining their own pockets with money literally stolen from investors through fraudulent Ponzi schemes.

The limited amount of illiquid investments in the fund have also been returned as quickly as possible and carefully managed to protect investors despite the events which engulfed Galleon. Mr. Rajaratnam is “not in the same league” as the Enron, WorldCom, or Computer Associates defendants either, since those defendants betrayed their own shareholders and employees. There has never been any allegation in this case that Mr. Rajaratnam did anything at the expense of his investors, much less that he squandered anyone’s retirement savings.

The evidence at trial showed that Mr. Rajaratnam was not the “mastermind” of an insider trading network, as the government and the press have painted him. Rather, the evidence established that Galleon was a well-run hedge fund employing dozens of analysts, traders, and portfolio managers, who engaged in thousands of legitimate trades. The evidence showed that Mr.Rajaratnam personally engaged in 36,437 stock transactions during the years in question (2005-09) – an average of 7,287 transactions per year or 30 per trading day. The government’s evidence concerned a small number of transactions over this period, amounting to 0.3% of Mr. Rajaratnam’s total transactions. Thus, over 99% of his stock transactions are not at issue, notwithstanding the wiretap interception of approximately 18,000 telephone calls over nine months during this period.

Because over 99% of Mr. Rajaratnam’s trades were untainted, it is clear that the vast majority of his trades were the product of Galleon’s legitimate analysis and research, with Mr. Rajaratnam engaging in practices that the Supreme Court has recognized as ‘commonplace’ and appropriate, i.e. ferreting out and analyzing information ‘by meeting with and questioning corporate officers and others who are insiders.’ The jury found that on a relatively small number of occasions, Mr. Rajaratnam crossed the line between obtaining appropriate information and obtaining inappropriate inside information. But neither the evidence presented nor the jury’s verdict established that Mr. Rajaratnam was an insider trading ‘mastermind’.

Mr. Rajaratnam cannot be compared to insider trading defendants in some of the other recent cases, such as lawyers who stole client information regarding corporate deals and traded on it. Those defendants, who were not in the business of legitimate investment management and stock trading, are all guilty of stealing client confidences and breaching fiduciary duties owed directly to their clients. In contrast, Mr. Rajaratnam’s fiduciary duties ran to his investors and included a duty to find and trade on promising investment opportunities on their behalf. Moreover, the evidence at trial showed that Mr. Rajaratnam traded many of the stocks at issue every quarter, without any allegation of receiving inside information concerning them. Mr. Rajaratnam traded these stocks frequently, legally, and would have traded in them regardless of the alleged inside information.

This discussion is not offered to excuse his conduct, as found by the jury. But an analysis of the nature and seriousness of the offense invites a comparison to Mr. Rajaratnam’s overall trading pattern and practice and, because he was alleged to be a tippee, to the conduct of those who breached their duty by providing the information to him. Indeed, because there can be no insider trading liability without a breach of duty by an insider, the Supreme Court has held that the tipper’s conduct, almost invariably, is more culpable than that of the tippee. This is particularly true where the tippee is a professional investment manager, who has an affirmative duty to find and exploit attractive investments on behalf of his clients.

The government has claimed that the profit realized from Rajaratnam’s insider trading deals is approximately $63.8 million. But this amount massively overstates the gain for several reasons. To calculate profit, the prosecutors compared the price of the shares on the day that Mr. Rajaratnam bought the shares in question to their price on the day that Mr. Rajaratnam sold the shares. But this methodology is flawed because it indiscriminately includes all movements in the share price between the date of the original purchase and the date of the final sale of the shares.

This methodology does not focus solely on the change in stock price attributable to the public announcement of the inside information. The government’s methodology improperly includes all movements in the stock price that occurred after the shares were initially purchased but before the announcement of the alleged inside information; and all movements in the stock price that occurred after the public reaction to the company’s announcement of the alleged inside information until the date of sale, even if that date is days or weeks afterwards. As a result, the government’s methodology artificially inflates the alleged profit. This results in serious computational errors in this case because Mr. Rajaratnam often purchased and held the stock positions for a period of weeks, or even months, before selling them.

For example, Intel announced its first quarter 2007 results after the market closed on April 17, 2007. The market would have reacted to this information during the trading day on April 18. If the shares were not sold until April 19 or even a week later on April 26, then other events, such as general market movement or other company-specific news (e.g. a new product launch), could have intervened to affect the share price. By comparing the price upon sale to the purchase price, the government used a methodology that did not limit the price gain solely to the inside information. This artificially increased the alleged profit and is unfair to the defendant.

A more accurate way to measure the gain is to calculate the increase in share price on the day of the company’s public announcement, or the following day if the announcement is made after the market closes. Then that price increase should be multiplied by the number of shares of that stock at issue, with the result yielding the gain, if any, resulting from having the alleged inside information before the rest of the market knew it. Using this methodology, the total profit for all the stocks at issue is $36,358,313 (excluding losses avoided) and $41,710,839 (including losses avoided). But as explained below, Mr. Rajaratnam himself did not realize this amount. Instead, Mr. Rajaratnam individually would have realized approximately $7,460,633 of this amount in performance fees and some return on his own investment in the funds, but in reality he received much less because the Galleon portfolios were not profitable in 2008 and no performance fees were paid.

In its calculation of the gain amount, the government has included so-called ‘losses Avoided’, as well as profit, for trades in Intel and Google. For certain trades in Goldman Sachs, it has included solely losses avoided. None of these amounts should be included in the gain calculation because they are not part of the ‘gain resulting from the offense’. As explained above, the $36.3 million figure is a more accurate measure of the Galleon trading profit from the inside information underlying the jury’s verdict than the government’s $63.8 million figure. But this number also overstates Mr. Rajaratnam’s culpability, since it represents the gain to Galleon and its investors rather than to Mr. Rajaratnam himself. The amount received by Mr. Rajaratnam individually ($7,460,633) is the fairer amount to use, since it represents the defendant’s own gains from the conduct at issue. ‘gain’ is the ‘total increase in value realized through trading in securities by the defendant or persons acting in concert with the defendant or to whom the defendant provided inside information’.

The defendant, Mr. Rajaratnam, did not realize anywhere near the $63.8 million in alleged profits that the government claims. The vast majority of these profits (whether using the government’s figure or the $36.3 million amount explained above) were realized by Galleon’s investors. Galleon Management L.P. generally charged a fund an annual management fee of 2% of the total assets under management in that fund, and if it made a profit for the fund on an annual basis, it also generally charged a fee of 20% of the profit realized by the fund. The 20% share of these profits was calculated on an annual basis, based on the overall profitability of the fund for the year; it was not calculated on a stock-by-stock transaction basis.

Profitable trades were offset by unprofitable trades. Only if the fund as a whole was profitable for the year did Galleon Management L.P. realize a 20% share in the profits. If the fund was unprofitable for the year, then no performance fee was earned and that deficit had to be made up the following year before Galleon Management shared in any of the profits for the following year. The fees that Galleon Management L.P. realized did not all go to Mr. Rajaratnam. These fees were used to pay for overhead expenses, including compensation for Galleon’s many employees and portfolio managers. Although he generally owned the largest single partnership percentage in Galleon Management L.P., Mr. Rajaratnam was not the sole partner. If the funds were profitable and fees were earned, other partners shared in the fees (after expenses) as well.

As Mr. Lau, Galleon’s former CFO, estimated for the funds for which he was the PM, Mr.Rajaratnam received approximately 50% to 65% of the fees that Galleon obtained. Mr. Rajaratnam also was an investor in the Galleon funds, by both direct investments he made in the funds and in the form of deferred compensation to which he was entitled from Galleon. Therefore, the amount actually realized by the defendant, $7,460,633, should be used as the gain for Guidelines purposes. But even that amount overstates the amount of gain actually realized by Mr. Rajaratnam because it incorrectly assumes that he was compensated based on the performance of individual stocks, when in reality he was compensated based on the performance of the portfolios that he managed.

If, for any given year, a portfolio was not profitable, Mr. Rajaratnam received no performance fee, regardless of how any individual stock within the portfolio performed. This fact is especially important in this case since, in 2008, when the financial crisis hit all the country’s financial markets, none of the Galleon funds made a profit, so Galleon Management received no performance fee from the funds, and hence none went to Mr. Rajaratnam. The Prosecutor requested a sentence of 235 to 293 months imprisonment (19.5 to 24.4 years). But due to the extenuating circumstances outlined above, the District Court of the District of Southern New York sentenced Rajaratnam to five years for counts 1 to 5 and to six years for counts 6 to 14 – a total of eleven years in jail. The FBI website observed that this was the longest jail term ever handed down for inside trading.

In October 2009, an article written by Michael de la Merced and Zachery Kouwe to the New York Times, stated that in 2007, Mr. Rajaratnam’s name arose in connection with an inquiry into fund-raising for the Tamil Tigers. A criminal complaint filed in Brooklyn Federal Court in 2007 described an ‘Individual B’ who donated $2 million to the terrorist group in 2000 and 2004. People briefed on the matter confirmed a report by The Wall Street Journal that Individual B was Mr. Rajaratnam, who was however, never charged. Several defendants in that case have pleaded guilty to raising money for the Tigers. In 2005 and 2006, the charity he created, Tsunami Relief, gave $1.5 million to the Tamil Rehabilitation Organization, a group officially dedicated to helping victims of the fighting. But prosecutors have since charged the Tamil charity with aiding the rebel group, and its non profit status has been suspended.

Concluded